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From Health Law Daily, January 9, 2015

Medical debt: a bad predictor of future bad financial behavior

By Danielle H. Capilla, J.D.

Medical bills are a cause of confusion for consumers who end up with collections tradelines due to uncertainty about what they owe, to whom, when, or for what according to a recent report released by the Consumer Financial Protection Bureau (CFPB). The report, titled “Consumer credit reports: a study of medical and non-medical collections,” explains collections tradelines, looks at the special case of medical debt and consumers’ medical payment obligations, and also discusses proposed standards.

Collections tradelines. When a consumer falls behind in payment of a loan or bill, efforts are typically made to collect the amount due. When this fails, the debt can be sent to an in-house collections department or a third-party debt collector, or the account can be sold to a debt buyer. Once in collections, any of these three entities can report the debt to one or more of the three nationwide consumer reporting agencies (NCRAs). The account will then appear on the consumer’s credit report as an “account in collection” which is referred to as a “collections tradeline.” The reporting system is voluntary.

Medical debt. Medical debt comprises approximately 52 percent of the collections tradelines appearing on consumer credit reports. Medical debt is unique for a variety of reasons, including the complexity of medical billing and third-party reimbursement processes. Medical collections tradelines were, until recently, weighted the same as non-medical collections.

However, the CFPB has found that the presence of medical collections tradelines on a credit report is less predictive of future defaults or serious delinquencies. Almost one in four consumers has one or more non-medical collections tradelines, and nearly one in five consumers has a credit report with collections tradelines that originated with a medical provider. Other tradelines typically originate with a telecommunication company, utility or energy company, or retail, banking, or financial collections. Education collections appear on less than one percent of consumers’ credit reports.

Unlike other types of services, such as credit cards, installment loans, or wireless cable services, most consumers are not told the costs of medical services in advance, particularly with emergency care. Furthermore, even when treatment is known in advance, the provider’s price and billed amount can vary depending on the insurer that covers the patient and pre-negotiated pricing between the insurer and provider for that treatment. Consumers have difficulty determining in-network and out-of-network situations, particularly for emergency care that might contain both types of providers. Consumer obligations vary based on deductibles and out-of-pocket caps that vary for individuals and families.

Consumer profile. The CFPB looked at 15,000 de-identified consumer complaints from May to June of 2014 to understand medical debt concerns and issues. The CFPB found that consumers who ordinarily pay their bills on time delay or withhold payment on medical debt due to medical pricing, billing, and reimbursement processes. Approximately 7 percent of consumers with one or more medical collections tradelines have no other type of collections. “Clean” consumers, with no delinquency greater than 30 days, differed considerably from consumers with serious delinquencies, and approximately half of consumers with medical-only collections tradelines had otherwise clean credit reports.

Proposed timelines. Variations of timing when overdue medical accounts are set for collections and when medical collections tradelines are reported would be impacted by a Proposed rule (77 FR 38148, June 26, 2012) issued by the Internal Revenue Service under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148). The Proposed rule would set a minimum period of 120 days following a hospital’s billing date before it could begin “extraordinary collection measures” which would introduce consistency. The CFPB noted, “In addition, mandating patient communications can improve consumers’ awareness of the existence of their debts prior to the debt being referred to collection agencies or their appearance as medical collections tradelines on the consumers’ credit reports.”

Conclusion. The CFPB determined that the system of collecting consumer debt and reporting collections tradelines has multiple points that are subject to error. Rules proposed by the federal government or industry best practices, such as those drafted by ACA International, that would standardize when delinquent medical accounts can be reported could introduce more consistency in the information about medical collections, leading to greater predictability of future credit behavior through scoring models.

Companies: Consumer Financial Protection Bureau

MainStory: TopStory GeneralNews ReimbursementNews HealthCareReformNews BillingNews HealthReformNews

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